November 14, 2010

Inside Job?

This looks like a worthwhile documentary on the causes of our great financial collapse. Reliable sources tell me it's a must-see. [Update: It's the this year's Academy Award Winner for Best Documentary]:



As I blogged and commented last year on this, there are two schools of thought on what the causes were. Some say it was shortsightedness and lack of adequate regulation, especially regarding the ratings agencies.

Others, such as this film blame widespread corruption at the highest levels of finance. For example, Matt Taibbi provides a compelling argument for this view, which he elaborates in a courageous new book that is as refreshing as it is sobering. His skewerings of Alan Greenspan in chapter two and of Goldman Sachs in chapter seven are masterful. And there's more. He was recently interviewed by Eliott Spitzer on his new program--on whom I also wrote (to much dismay) in the Wall Street Journal.

My view is that the collapse was surely a bit of all three, namely, shortsightedness, lax regulation, and corruption. But the corruption was (and perhaps still is) not so deep and widespread that the collapse would have happened without the more systemic problems that helped engender the shortsightedness and under-regulation. If there is a policy lesson to be learned here, I think it's that business needs to be incentivized  to do the responsible thing. But this is very difficult for the government to accomplish in an atmosphere hostile to regulation.

The alternative solution is for shareholders and consumers to demand more responsible behavior from the banks themselves. For example, they can begin by demanding more transparency so that banks such as Goldman Sachs stop secretly betting against many of their own clients. This is how the bank made billions on the mortgage crisis.

To me, the business-ethical failure at root here is essentially a character flaw, namely, a cynical disregard for the moral responsibility to stand behind the integrity of the product one is selling, whether it be a mortgage-backed security or a Hummer. No one should seek to profit by enabling or encouraging another's irresponsible behavior in the interest of short-term profit. Aristotle pointed out over 2 thousand years ago that this is vile behavior. Kant later showed that it is destructive to the entire system. And Mill gave us utilitarian reasons to erect constraints to prevent such crashes.

But at the end of the day, if businesspersons continue to blithely persist in willful ignorance of what exactly they are selling, history will keep, inexorably, repeating itself. Each of us has a moral obligation to stop and take a fresh look, every now and then, at the soundness of our commercial, social, and ecological behaviors.

2 comments:

  1. I'm excited to see Inside Job, I think it's going to be an important tool for explaining the crisis to many people.

    Thanks!

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  2. The film seems to be shaking up the the economics profession: http://www.nytimes.com/2010/12/31/business/economy/31economists.html?_r=1&hp

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